Due diligence and preparation are necessary if you're interested in investing in a multifamily commercial property. In this blog, we list all the essential factors to consider before you pull the trigger.
Thanks to the internet, it's easier than ever to find information about interesting multifamily properties without having to go there yourself—at least not initially. Here are some of the questions to ask as you do your online research about a building:
While it is possible to get valuable data about a property online, you also need to physically see the property and explore the neighborhood to get more in-depth information. Be prepared to ask these questions:
Once you're more confident of your interest in a multifamily property, it's time to take things a step further and start the process of due diligence. Here's a checklist of factors to look at.
Have the central systems—including plumbing, heating, air conditioning, and electrical—checked by certified professionals. These systems can be costly to replace; they may eat up your entire repair and maintenance budget if they turn out to be in poor shape.
Done by a third-party property consulting business, this type of report is an in-depth analysis of the property's operating history. It also analyzes all the individual components of the asset's expenses and operating income.
This is a detailed comparison in contrast to the market to which the property belongs. The building is compared to similar properties and is assessed using rent price, occupancy rate, historical statistics, building age, unit type, amenities, etc. You can use the outcome of this report to confirm rental rates.
A lease audit involves a formal review of all the leases in the property. It also consists of an analysis of the expense figures, stated income, lease language, and billing methods. Its primary purpose is to verify that all billings are accurate and are compliant with the lease terms.
It's important to review all service contracts, including contracts for pool cleaning, window cleaning, trash removal, lawn mowing, etc. Such agreements are likely to be maintained even after a new owner has taken over, making sure you understand them.
It's a good idea to confirm all the utility bills—such as electricity, water, and gas—that you will be responsible for as the new owner of the property.
Ask for a copy of the previous owner's marketing materials so you can see what worked and what didn't. This will help you sell the property to your target tenants better.
Get a copy of the certificate of occupancy for all the buildings in the property, plus copies of additional building permits and licenses required by law to purchase, operate, maintain, and manage the real estate asset.
If you've ever bought an investment property before, then you know that finances and operation processes are some of the most important in making property viable. Here are some things to consider before buying that multifamily building:
You want to ensure that the multifamily property will bring in enough cash flow to be worth your while. To determine its lucrativeness, look at its income and expenses. Don't make the mistake of being too optimistic; if anything, you should be conservative. You need a realistic financial picture to honestly decide if a multifamily property is a good investment or not.
Please don't underestimate the amount of money it will take to maintain a multifamily building. Be sure to account for property taxes, repairs and maintenance costs, utilities, insurance, and administrative costs.
Do you intend to hire a property manager, or will you be managing the multifamily yourself? If you plan to go the DIY route, make sure you have the time, skills, and local knowledge to devote to the task. Expect to be on call 24/7 for tenant issues and repairs.
How will you handle tenants, leases, evictions, security deposits, and escrows? These tasks require specialized knowledge to ensure that you remain compliant with the law and professional in your property management.We've covered many of the factors to look at before buying a multifamily property in this checklist. But not all buildings are the same; some may require a closer look at certain due diligence factors. The key is to ensure that you are well aware of all the things that may go wrong to adequately prepare for acquiring the multifamily property. Talk to a commercial mortgage finance expert if you need help to get a commercial multifamily loan.
